The Corporate Tax Planning Law Review: Australia

Introduction

Australia is generally a stable and low-risk destination for investment because of its resilient economy, investment opportunities across diverse industries and strong trade ties with the world. It has a mature and complex tax system that, consistent with broader OECD trends, has an increasingly active regulator that is targeting cross-border and inbound structures.

This has involved a three-pronged approach: addressing existing anti-avoidance rules, amending the treaty network through the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS Multilateral Instrument (MLI) and a new enforcement ethos.

Local developments

i Justified trust and legal professional privilege

The Australian Taxation Office (ATO) continues to apply the OECD concept of 'justified trust' in its assurance approach. Under justified trust, the ATO seeks objective evidence from taxpayers that would lead a reasonable person to conclude that the taxpayer has paid the right amount of tax and met their tax obligations in a timely and transparent manner.

The ATO is continuing to roll out assurance reviews to its top 100 and top 1,000 clients, with specialist tax performance teams assigned to each taxpayer for intensive, tailored assurance reviews. This approach has been coupled with the ATO targeting blanket unwarranted legal professional privilege claims being made over documents that do not contain independent legal advice or that contain aggressive tax planning arrangements disguised as privileged documents, creating an environment with heightened tax risks for investors and large corporates.

ii Entity selection and business operations

Income taxes2 are imposed by the federal government and collected by the ATO, led by the Commissioner of Taxation (the Commissioner).3 No state or territory government imposes income tax; however, they each impose their own taxes, including stamp duty, land tax, motor vehicle transfer duty and payroll tax.4

Income tax operates on residency and source bases. Residents of Australia are generally taxed on worldwide income. Non-residents are taxed on Australian-source income.

Australia operates a self-assessment income tax system. Companies are generally subject to a 'full' self-assessment system requiring companies to self-assess their tax liability and report this information to the ATO by lodging their taxation returns.5

Indirect federal taxes, such as the broad-based value added tax called the goods and services tax (GST), which is imposed at 10 per cent, are also self-assessed.

Returns may be audited by the ATO and amended generally within four years of assessment. An unlimited period of review applies in cases of 'fraud or evasion' by the taxpayer.6

Businesses are required to register for pay-as-you-go (PAYG), a single integrated system for withholding amounts from certain types of payments, including:

  1. business and investment income;
  2. wages and salaries paid to employees;7 and
  3. payments to other businesses that do not quote their Australian Business Number.

A reporting framework called 'single touch payroll' applies to all employers and operates by electronically transmitting payroll information in real time to the ATO when wages, salaries and other amounts are paid to employees.

A compulsory superannuation system operates in Australia. Generally, where an employee earns A$450 or more pre-tax income in a calendar month, employers are required to pay 10 per cent8 of an employee's ordinary time earnings9 to a complying superannuation fund of the employee's choice. Complex rules and concessions apply to superannuation contributions and income derived by funds.

Tax concessions are available to not-for-profit organisations, including an income tax exemption. These generally require satisfaction of purposive criteria and registration with relevant authorities.10

Entity forms

Australian businesses are commonly structured as companies, partnerships or trusts. All entities must register with the ATO11 and lodge annual income tax returns.

No 'check-the-box' election is available; however, entity selection remains a choice for business owners, with taxation treatment generally following the nature of the entity.

Partnerships and trusts

Partnerships (other than limited partnerships (LPs)) are fiscally transparent, with partners being subject to tax on their allocation of income in accordance with a partnership agreement.

Trusts are generally fiscally transparent.12 Beneficiaries that are 'presently entitled' to trust income are usually subject to tax on their share of the trust's taxable income.13 Trusts should distribute their income to beneficiaries annually as trustees failing to do so will be assessed on accumulated income.14

Managed investment trusts (MIT) are an important vehicle type for projects in the property industry, particularly where foreign investors are involved. They are highly suited to passive, long-term investments in Australian real estate for the purpose of deriving rental income streams but are unsuitable vehicles for constructing property for the purposes of sale. The key advantage of a MIT structure is that eligible foreign investors (who are tax residents in certain countries, including Singapore, China, Hong Kong, the UK, the US, New Zealand, Canada, France, Germany, South Africa and the Cayman Islands) can benefit from a 15 per cent final tax rate on trust distributions if certain criteria are met.15 A 10 per cent final tax rate applies for 'clean building MITs'.

Companies

Companies are not fiscally transparent and pay corporate tax.

An imputation system applies to distributions16 paid by Australian-resident companies. Under this system, refundable tax credits are available17 to Australian-resident shareholders for underlying Australian corporate tax paid on any 'franked' distribution received. This is intended to alleviate double taxation, which occurs under a classical dividend system.18 Shareholders are taxed on 'unfranked' dividends at their marginal tax rate.

For the managed funds sector, a new corporate collective investment vehicle (CCIV) regime will commence on 1 July 2022.19 A CCIV will be a new form of company used for collective investment, which will be fiscally transparent by default and must have at least one sub-fund. Sub-funds will not have separate legal personality but each sub-fund's assets and liabilities will be segregated from the assets and liabilities of other sub-funds. The CCIV regime is intended to be similar to other countries' managed funds regimes to provide a sense of familiarity to foreign investors.

Foreign hybrids

Australia's foreign hybrid rules20 operate to treat foreign companies and foreign LPs controlled by Australians as partnerships for Australian income tax purposes. This impacts the nature of distributions received by Australian members in the foreign hybrid entity.21

Choice of entity

Entity choice is generally linked with the character of the investors and the underlying assets. The default vehicle for trading businesses is a company, as it can retain cash without penalty and pay franked distributions.

Outbound investments from Australia are typically structured through companies as they have access to participation exemptions for non-portfolio dividend income22 and capital gains on disposal of shares in foreign companies carrying on active foreign businesses.23

Unit trusts are routinely used in the property sector as they have the advantage of being able to pay 'tax deferred' distributions24 to members and widely held property trusts can qualify as MITs (discussed above).25

Discretionary trusts are generally used in private groups to assist in income splitting between family members.26

Foreign Investment Review Board

As part of investing into Australia, a screening process will need to be undertaken with the Foreign Investment Review Board (FIRB). The FIRB is the government agency responsible for examining proposals by foreign investors to acquire interests in Australian real estate (including agricultural land and water entitlements). The FIRB makes a recommendation to the Australian Treasurer on whether to approve foreign investment and any conditions attached to the approval.

The ATO coordinates with government agencies, including the FIRB, to obtain advance warning of significant transactions that might impact revenues.

The FIRB consults the ATO in the approval process to determine the potential tax impact of proposed foreign investment. The ATO provides a risk rating for the proposed transaction and may advise the FIRB to impose tax conditions.27 This process gives the ATO considerable leverage to obtain information at the time of implementation.

A breach of tax conditions may lead to prosecution or a divestment order. The FIRB may also impose other obligations on the investor, such as supplying certain information or requiring an ATO ruling to be obtained.

Domestic income tax

Australian-resident companies are taxed on worldwide income at the flat rate of 30 per cent; however, those qualifying as 'base rate entities' are eligible for a reduced rate of 25 per cent from 1 July 2021.28 Companies do not benefit from the 'tax free threshold' for Australian-resident individuals.29

Foreign companies are taxed on Australian-source income at a flat rate of 30 per cent.

Subject to integrity rules,30 individuals are entitled to a 50 per cent discount on capital gains made on assets held for at least 12 months, including where the gain flows through a trust.31 Companies and non-residents are not entitled to this discount.

International tax

Australian residents are taxed on foreign-source income.32 Double taxation is addressed through an extensive treaty network (currently being updated under the MLI) and credits for foreign tax paid.33

Offshore profits may be repatriated to an Australian company by payment of exempt non-portfolio dividends; however, subsequent dividends paid by the Australian company will be subject to tax at marginal rates in Australia, unless franking credits are otherwise available. This effectively means that these participation exemptions merely defer Australian tax for Australian-resident shareholders in respect of interests in foreign companies.

Non-residents who receive an unfranked dividend sourced from offshore exempt dividends do not pay any Australian dividend withholding tax (WHT) under the conduit foreign income regime.34 This is intended to promote Australia as a holding company jurisdiction, although the success of this policy is unclear.

Australian branches of foreign subsidiaries are generally subject to tax at the corporate rate on income connected with the permanent establishment (PE).35 These profits can then be repatriated offshore free of further Australian tax.

Integrity rules

Taxation of foreign income has been an area of significant legislative change, including new integrity rules targeting profit shifting and avoidance within multinational groups or significant global entities (SGEs).36

SGEs are subject to additional reporting; integrity measures, including the diverted profits tax (DPT) and the multinational anti-avoidance law (MAAL); and increased penalties.

An SGE is an entity that is:

  1. a global parent entity37 (GPE) with annual global income of A$1 billion or more;38
  2. a member of a group of entities consolidated for accounting purposes in which another group member is a GPE with annual global income of A$1 billion or more; or
  3. a member of a notional listed company group and one of the other group members is a GPE with an annual global income of A$1 billion or more.39

For these purposes, a notional listed company group is a group of entities that would be required to be consolidated as a single group for accounting purposes assuming a member of that group were a listed company (and ignoring any exceptions in accounting principles that permit an entity not to consolidate).40 As a consequence, an SGE can include entities such as high wealth individuals, partnerships, trusts, entities considered to be non-material to a group and certain investment entities (and those that they control), including in circumstances where consolidated financial statements have not been prepared.

From 1 July 2017, the aim of the DPT is to ensure that SGEs pay tax that reflects the economic substance of their activities in Australia.

The DPT applies only to SGEs41 earning more than A$25 million revenue in Australia and requires that the SGE, or a foreign entity associate, entered into or carried out a scheme for which a principal purpose was to obtain an Australian or foreign tax benefit.

If applied, the DPT will result in a 40 per cent penalty rate of tax being levied on the affected entity, which must be paid up front. The DPT is intended to minimise the information asymmetry present in transfer pricing cases by shifting the onus to taxpayers to provide transfer pricing analysis before the ATO pursues litigation.

The MAAL was Australia's unilateral legislative response to PE avoidance schemes. The MAAL applies to a scheme if under, or in connection with, the scheme:

  1. a foreign SGE supplies goods or services to an Australian customer;
  2. an Australian associate or commercially dependent entity undertakes activities directly in connection with the supply;
  3. some or all of the income derived by the foreign entity is not attributable to an Australian PE; and
  4. a principal purpose of the scheme is to obtain an Australian tax benefit or foreign tax benefit.42

Where the Commissioner determines that the MAAL applies, any tax benefits arising under the scheme can be cancelled and penalties imposed.43

The MAAL has largely achieved its intended effect of onshoring profits from sales to Australian customers. In December 2019, the ATO announced that, with the assistance of the MAAL, Google settled its tax dispute with the ATO by paying an extra A$481.5 million on top of its previous tax payment.44 In addition, the operation of the MAAL resulted in A$8 billion in taxable sales being returned to Australia in 2018–2019.45

Activities and tax concessions

Australia does not have income tax rate differentials for industry sectors, other than a specialised offshore banking unit regime.46

Tax concessions are available for start-ups and certain research and development activities, including:

  1. refundable tax offsets for 'eligible entities' with an aggregated turnover of less than A$20 million, at a rate 18.5 per cent above the corporate tax rate from 1 July 2021;
  2. non-refundable tax offsets for all other eligible entities with an aggregated turnover of more than A$20 million with tiered rates applying from 1 July 2021;47
  3. an early-stage innovation company tax incentive, which gives investors a 20 per cent refundable tax offset for their investment and a 10-year capital gains tax (CGT) exemption where the investment in an eligible entity is held for more than 12 months;48 and
  4. the start-up employee share scheme rules,49 which exempt the provision of shares or options to employees of start-up companies under compliant schemes.

Capitalisation requirements

Australia does not have corporate minimum capitalisation requirements. Thin capitalisation rules exist that prevent base erosion by disallowing debt deductions where the debt-to-asset ratio of Australian operations exceeds prescribed debt limits. Higher limits apply to banks and financial entities.

A 'general entity'50 calculates its 'maximum allowable debt' under one of three elective methods.

The predominant method is the 'safe harbour debt amount' (SHDA). This method allows an entity to be funded by debt up to an amount equalling 60 per cent of the average value of the entity's Australian assets calculated based on the accounting balance sheet, subject to certain adjustments.51

Entities geared above the SHDA may apply the arm's-length debt test (ALDT) or worldwide gearing debt test (WWGT).

To rely on the WWGT, foreign-controlled entities must have audited accounts demonstrating that less than 50 per cent of the group's assets are in Australia.52

The ALDT sets the debt limit based on a hypothetical amount that could be borrowed given certain assumptions, including that the entity does not have any explicit or implicit credit support. In practice, the ALDT is highly subjective and requires significant work to document.

In contrast, the WWGT permits gearing of Australian operations up to the level of the worldwide group. It is based on audited accounting values and is more objective than the ALDT.

iii Common ownership: group structures and intercompany transactions

A consolidation regime53 allows wholly owned groups of companies, eligible trusts and partnerships to consolidate for income tax purposes.54

Consolidation requires the head company and subsidiary entities to be Australian tax residents.55 Australian-resident wholly owned subsidiaries of a common foreign holding company may form a multiple-entry consolidated group.

A consolidated group is treated as a single entity for income tax purposes. Tax attributes are pooled and transactions between members are disregarded, permitting the transfer of assets between wholly owned entities with no income tax implications.56 For this reason, group restructures generally make extensive use of the consolidation regime.

Assets can also be transferred tax free between an Australian entity and a foreign resident free from CGT, provided that the transferor and transferee are members of the same wholly owned group.57

Ownership structure of related parties

Tax grouping and loss sharing

Consolidation is necessary to pool tax losses in a group.58

On joining, all of the entity's carry-forward losses that could have been used outside the group at the time of joining are transferred to the head company.59 Integrity rules operate to prevent losses from being used at a greater rate than they would have been without consolidation.60

Accruals taxation

Australia has robust and broad-based controlled foreign company (CFC) rules,61 which capture passive and 'tainted' service and sales income. The CFC rules are considered to meet the 'best practice' base erosion and profit shifting (BEPS) criteria.62

Planning opportunities are limited and mostly involve ensuring that Australian entities do not control the CFC or that 'active income' makes up 95 per cent or more of the CFC's income,63 although this is difficult in light of an associate inclusive in-substance control test.64

Australia has repealed its foreign investor fund (FIF) rules. The FIF rules formerly taxed accrued gains on 'portfolio' interests.65

Domestic intercompany transactions

General deductibility

Although there are no general domestic transfer pricing rules, limitations exist on the deductibility of related-party expenses. Excessive payments may be characterised as distributions of profit and, consequently, are not deductible.66

Limitations also exist on the deductibility of related-party expenditure. For example, deductions for related-party expenditure are not generally available until the period in which the recipient treats the receipt as assessable.67

MIT non-arm's-length income

The MIT rules uniquely contain specific non-arm's-length income (NALI) rules.68 If the Commissioner determines an amount to be NALI, the trustee is taxed at the corporate rate on the excess of the NALI amount over the hypothetical arm's-length amount minus deductions that are referable only to the amount of the excess.69 The NALI rule is an integrity rule aimed at preventing the abuse of the 15 per cent WHT rate. It will generally apply to businesses that derive rental or similar passive income such as property funds or infrastructure assets.

International intercompany transactions

Transfer pricing

Australia has a robust international transfer pricing regime that is supported by the application of the DPT to SGEs and country-by-country (CbC) reporting obligations.70 The transfer pricing regime operates on an arm's-length principle and permits the ATO to adopt a reconstruction approach to determining the impermissible transfer pricing benefit.71

The 2017 Chevron case 72 provided judicial guidance on applying the transfer pricing provisions to cross-border related-party financing. The court held that an arm's-length rate of interest should not be determined as if the subsidiary were a company separate from the rest of the group. This will have significant implications for pricing cross-border debt in multinational groups as the subsidiary will need to account for the group's creditworthiness. The principles outlined in Chevron were reaffirmed in the 2019 Glencore case in which Glencore succeeded against the ATO at first instance in 2019 and on appeal in 2020.73

Information exchange

Australia also participates in information exchange under both the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) regimes.74

CGT

Australia's CGT regime applies to related-party transactions.

Australian residents are subject to CGT on a worldwide basis.

Foreign residents are subject to CGT only on assets that are 'taxable Australian property',75 including real estate in Australia or CGT assets used in an Australian PE.

Integrity rules exist to deem a transfer to be at market value if the transaction is not at arm's length.76

Tax is payable on net capital gains. A capital loss may be offset against capital gains or carried forward to later income years. Companies are entitled to carry forward capital losses provided that they have either substantially maintained the same ownership and control or carried on the same business.77

Australia does not currently have a permanent tax or capital loss carry-back regime; however, a covid-19-related measure that has been introduced is the temporary loss carry-back measure allowing eligible corporate entities to carry back losses made up to and in the 2021–2022 income year.78

The operation of the CGT rules means that cross-border related-party transactions might have Australian tax implications where the vendor is an Australian entity or where the asset is land or an interest in a land-rich entity. No CGT implications arise for foreign entities where the asset is not land or an interest in a land-rich entity.

iv Third-party transactions

The taxation implications of third-party transactions depend on whether the transaction is on revenue or on capital account, which is a question of fact. This subsection addresses third-party transactions on capital account, generally including divestment of investments and similar transactions.

Sales of shares or assets for cash

Australian companies may reduce their capital gains from disposals of shares in a foreign company under a participation exemption.79

The exemption requires the Australian company to have held a 'direct voting percentage' of 10 per cent or more in the foreign company throughout a 12-month period that began no earlier than 24 months before the time of disposal. Under the exemption, the gain is reduced by a percentage reflecting the foreign company's 'active business' asset use. The relevant percentage reduction is calculated by a market value or book value method at the taxpayer's election.80 If that percentage is greater than 90 per cent, the gain is reduced by 100 per cent.

There is no other relief on a cash sale of assets.

Tax-free or tax-deferred transactions

Scrip for scrip

In a takeover involving the issue of some shares, a vendor may be able to defer paying CGT until a later CGT event to the extent of the scrip consideration. The exchange should be structured carefully so that the same arrangement is offered to all shareholders of the same class.81 This rollover does not permit an exchange of shares for units, or vice versa; however, it does permit a rollover of redeemable preference shares (RPS) even if they are treated as debt for income tax purposes. Importantly, if RPS are 'voting shares' for the purposes of the Corporations Act 2001, they must be able to participate in the exchange.82

There is no specific rollover available for the exchange of tangible or intangible assets other than in specific circumstances (e.g., when the asset is damaged).83

Rollover relief may apply to the interposition of a new holding company between a company and its shareholders84 where interests in a newly incorporated holding company are issued to all of the shareholders in exchange for all of their interests in the original company (and nothing else).85

Demergers

An entity may choose to roll over a capital gain or loss arising from a demerger of entities from a group provided that a number of eligibility conditions are satisfied.86

Observations have been made by industry that the ATO is narrowing the scope87 of the demerger tax relief provisions.88

One criterion is that shareholders of the head entity must acquire shares in the demerged entity and nothing else (of value). The ATO previously accepted that demerger tax relief would apply where the shareholders of the demerged entity sold their shares after the demerger (e.g., under a takeover) provided that the demerger was not conditional on the subsequent share sale occurring.

The ATO's Taxation Determination TD 2020/689 gives the following examples:

  1. demerger tax relief will be available where a head entity is sold after a subsidiary is demerged pursuant to a takeover bid that is legally and commercially independent of the demerger;90 and
  2. where a subsidiary is demerged with the intention of preparing the head entity for sale, the 'nothing else' requirement will not be satisfied (where it can be objectively inferred that the demerger was unlikely to have occurred except to prepare for the head entity's sale).91

The ATO has previously expressed the view to particular taxpayers that relief is not available where a demerger is followed by a share sale as the nothing else requirement is not met, in some cases even absent conditionality between the two.92 Now, in TD 2020/6, the ATO expresses as a public view applicable to all taxpayers that a restructuring is not necessarily confined to the steps or transactions that specifically deliver the ownership interests in the demerging entity to shareholders, but it may include previous or subsequent transactions (even if they occur several months apart), regardless of whether those transactions are legally independent of one another, are contingent on different events or are transactions that might not occur. This wider view of a 'restructure' is expected to make it more difficult for entities to satisfy the demerger tax relief provisions, such as where a head entity or subsidiary is sold after a restructure or a capital raising is undertaken as part of a restructure.93

There continues to be no public guidance or explanation for the ATO's narrowing interpretation of the demerger tax relief provisions.

Review of rollovers

In December 2020, the Board of Taxation released a consultation paper94 as part of its review into the existing CGT rollover framework. The Board provided interim written advice to the government on 25 March 2021 and will submit a final report by 22 April 2022.

Corporatisation

Rollover relief will be available where an individual, partner or trustee disposes of the assets of a business to a wholly owned company.95 This is commonly done as part of an exit from a business operated as a sole trader or through a discretionary trust.

The balance sheet of the business must be managed to ensure that the liabilities assumed by the company do not exceed the sum of the market value of precluded assets96 and the cost base of the non-precluded assets. There is frequently difficulty in satisfying this requirement where the value of the business is largely internally generated goodwill.

Intangibles

There is no specific rollover for intangible assets.

Liquidations

Liquidation dividends sourced in profits are assessable as dividends. Liquidation proceeds not attributable to profits are treated as capital proceeds of liquidation and may trigger a capital gain. No specific relief is available.97

International considerations

Two noteworthy issues arise in relation to third-party cross-border transactions.

First, key integrity rules around interest WHT-free financing apply only where the counterparty is an unrelated non-resident financier. For example, the public offer test is deemed to have been failed if the financier is a related third party.98

Second, clawback rules can apply to the sale of shares. CGT Event J1 applies where there was previously a rollover of a capital gain on transfer of an asset between members of a wholly owned group. The tax liability is triggered if the transferor and transferee cease to be wholly owned. Any share sale structuring should take account of this possibility.99

v Indirect taxes

The GST is a broad-based (value added) tax of 10 per cent applying to most goods, services, and other items sold or consumed in Australia. A number of goods and services are exempt from GST – in particular many medical goods and services, most 'basic' food and exports.

Registration for GST is mandatory for Australian businesses with a GST turnover exceeding A$75,000, increasing to A$150,000 for non-profit organisations.

Non-resident entities are required to register if they are carrying on an enterprise and have a GST turnover from sales connected with Australia exceeding A$75,000.

The 'Netflix tax' imposes GST on sales of imported services and digital products to purchasers that are 'Australian consumers',100 being an Australian resident who either:

  1. is not a business registered for GST; or
  2. purchases the product for non-business use.

Several other indirect taxes in Australia are limited to specific industries or products. For example, a luxury car tax of 33 per cent is imposed on vehicles over the relevant inflation indexed threshold,101 and a wine equalisation tax is imposed at 29 per cent of the wholesale value of wine, payable by entities making, wholesaling or importing wine into Australia.

Fuel tax credits provide businesses with a credit for excises or customs duty that was included in the price of fuel used in machinery, plant, equipment and vehicles travelling off public roads.102

International developments and local responses

i OECD-G20 BEPS initiative

Australia has implemented a number of measures supporting international tax transparency in response to the OECD BEPS Action Plan, making cross-border arbitrage more difficult.

Automatic exchange of information: Common Reporting Standard (Action Item 5)

CRS legislation applies in Australia. The first exchange of information (EOI) occurred in 2018. Australia has taken a 'wider approach' to CRS by requiring financial institutions to report all tax residence details of a person opening an account, irrespective of whether the person is resident in a jurisdiction that has adopted the CRS.103

Country-by-country reporting (Action Item 13)

Under Australia's CbC reporting rules, an entity will have CbC reporting obligations for an income year if it is an SGE that was an Australian tax resident or a foreign entity with an Australian PE during the income year.104

An Australian entity that files a CbC report in another jurisdiction can be exempted if the ATO can obtain that report from the relevant tax authority.

Hybrid mismatch rules (Action Item 2)

Australia's hybrid mismatch rules105 are intended to deter the use of arrangements that exploit differences in tax treatment of an entity or financial instrument under cross-border income tax laws that result in double non-taxation or long-term tax deferral. This is achieved by denying tax deductions or including amounts in assessable income to neutralise the benefit.106

A broad integrity provision also applies to certain deductible interest or derivative payments made to an interposed foreign entity where the foreign income tax rate on the payment is 10 per cent or less.107

Multilateral Instrument

Australia has adopted most, but not all, of the Articles under the MLI.108 If there is a bilateral match in the Articles adopted, the MLI will modify the nominated tax treaty clauses.109

The introduction of a principal purpose test is one of the most far-reaching amendments for structuring work. It is intended to combat treaty shopping and ensure that all entities in an offshore structure have commercial substance.

Transfer pricing

Australian law has been amended to explicitly require that the arm's-length principle be applied consistently with the OECD's Aligning Transfer Pricing Outcomes with Value Creation, Actions 8–10 Final Reports.110

The harmonisation of transfer pricing guidance and additional detail on key risk areas are expected to reduce future opportunity for transfer pricing arbitrage.

ii EU proposals on taxation of the digital economy

Australia recognises that its revenue collections are particularly exposed to the effects of globalisation as Australia relies more heavily on corporate income tax than comparable OECD countries.111

The ATO has a dedicated tax avoidance workforce that targets artificial tax minimisation structures employed by multinational enterprises (MNEs) in the e-commerce and digital economy industry112 and has addressed key tax issues,113 including:

  1. transfer pricing – determining the arm's-length outcome for Australian subsidiaries of e-commerce MNEs with inbound supply chains;
  2. PEs – identifying the existence of a PE under the relevant DTA, noting that the issues with PEs have lessened in light of the MAAL;
  3. royalty WHT – characterising payments made by Australian software distributors to offshore licensors for royalty WHT purposes;114 and
  4. GST – enforcing the Netflix tax discussed earlier.

iii Tax treaties

Australia has income tax treaties (double tax agreements (DTAs)) with 45 countries, comprising all developed countries and many major developing countries, including China, India and Indonesia. Australia does not have a DTA with Hong Kong.

Australia's DTAs are intended to prevent double taxation of the same taxpayer in respect of the same income; however, they are not designed to prevent taxation of different entities on the same income.

Australia has limited DTAs with tax havens,115 which generally allocate taxing rights over certain income of individuals and contain procedures to address transfer pricing adjustments.

Separately, Australia has tax information exchange agreements (TIEAs) with several non-OECD countries, including Bermuda, the British Virgin Islands, the Cayman Islands and Guernsey.

These TIEAs provide for EOI between participating countries on civil tax and criminal matters, with a view to eliminating harmful tax practices.116

The extension of the DTA and TIEA networks is another plank in the ATO's data collection and matching strategy targeting abuse of the cross-border tax system.

Notable typical or model provisions

The structure of Australia's DTAs broadly conforms to the OECD Model Tax Convention on Income and on Capital,117 meaning that Australia is largely in line with its OECD partners in respect of the content of its treaties.

Under this model, recipients of dividends, interest and royalties (DIR) in treaty countries benefit from reduced rates of WHT.

The following table summarises the possible range of reduced withholding rates118 (noting the specific rate depends on the DTA).

PaymentNon-DTA countryDTA country
Dividend30 per centZero per cent to 20 per cent
Interest10 per centZero per cent to 5 per cent
Royalty30 per centZero per cent to 25 per cent

Dividends paid to non-residents are exempt from dividend WHT except when paid out of profits of a company that have not borne Australian tax (i.e., 'unfranked' dividends). Unfranked dividends paid to non-residents are exempt from dividend WHT to the extent that the dividends are declared by the company to be conduits for foreign income. A deduction is allowed in certain cases to compensate for the company tax on inter-entity distributions where these are paid by holding companies to a 100 per cent parent that is a non-resident. Dividends paid to a non-resident in connection with an Australian PE are taxable to the non-resident on a net assessment basis (i.e., the dividend and associated deductions will need to be included in the determination of the non-resident's taxable income; the dividend is not subject to dividend WHT) and a franking tax offset is allowable to the non-resident company for franked dividends received.

The WHT rate on MIT distributions is reduced from 30 per cent to 15 per cent for recipients who are tax residents of a country with which Australia has an EOI agreement. EOI agreements are distinct from TIEAs. As at 30 March 2022, 137 countries are on the EOI list.

Recent cases

i Perceived abuses

Tax alerts

The ATO provides public guidance in many forms, including taxpayer alerts, which serve as 'early warning to the community about a new or emerging activity that is causing the ATO concern'.119

Entities that have entered or continue to enter into the arrangements identified in the alerts will ordinarily be the subject of increased scrutiny. Alerts in recent years have focused on cross-border transactions. For example, 2018 alerts focused on the mischaracterisation of payments to foreign entities that supply the use of intangible assets to Australian companies, resulting in underpayment of royalty WHT,120 and WHT deferral schemes.121 A 2019 alert identified the risk of multiple entry consolidated groups avoiding CGT through intra-group debt.122 Alerts in 2020 outlined the ATO's concerns about the appropriate recognition and reward of cross-border arrangements connected with the development, enhancement, maintenance, protection and exploitation of intangible assets;123 concerns about arrangements that mischaracterise the structures used by foreign investors investing directly into Australian businesses that reduce taxable income of WHT payable;124 and concerns about the use of interposed offshore entities to avoid interest WHT.125 These alerts highlight the trend in the ATO targeting transactions that appear to lack commercial rationale or substance, or both.

ii Recent successful tax-efficient transactions

There have not been any recent notable Australian examples of successful tax-efficient transactions, mainly because of the ATO's increasing involvement in developing tax policy and its increasingly robust administration of tax laws.126

The ATO is targeting tax exploitation schemes following the Paradise Papers leak. The leak alerted the ATO to schemes aggressively marketed by big Australian accounting firms127 and the possibility of seeking civil penalties under Australia's promoter penalty provisions.128 To date, the ATO's practice has been to accept enforceable voluntary undertakings129 from accounting and law firms to stop promoting, marketing and encouraging tax exploitation schemes.130 Although these undertakings have allowed the ATO to quickly end promotion activity, the legality of the schemes and advisers' roles has not been tested judicially.131

iii Limited partnerships

In Commissioner of Taxation v. Resource Capital Fund IV LP,132 the Full Federal Court of Australia dealt with Australia's right to tax profits made by fiscally transparent Cayman Islands LPs on their sales of Australian shares.133 The case raises several important points for foreign investors (particularly private equity investors) in Australian companies, including that LPs are separate taxable entities that are liable to Australian tax like a company,134 despite LPs not having legal personality like a company.135 For Australian tax purposes, the relevant taxable entities were not the partners of the LPs.

Each LP was not entitled to rely on the US–Australia DTA as each LP did not satisfy the dual requirement136 to be a US 'resident' within the meaning of Article 4(1)(b)(iii) of the DTA. That was because the LPs were organised under the laws of the Cayman Islands (and thus could not be tax residents of the United States) and the LPs were not liable to pay tax in the United States.137

The profits made by the LPs on their sales of Australian shares had an Australian source, having regard to the significant amount of investment management services provided by individuals in Australia throughout the investment term and the fact that the share sales occurred under schemes of arrangement in Australia (such that the schemes were the 'proximate' origin of the profits earned).138

iv Transfer pricing

On 17 December 2021, the Federal Court of Australia handed down its judgment in the transfer pricing dispute between Singapore Telecom Australia Investments Pty Ltd and the Commissioner of Taxation.139 Justice Moshinsky dismissed the taxpayer's appeal and found in favour of the Commissioner, upholding the denial of approximately A$894 million of interest deductions on intercompany debt. The Court accepted that the original interest rate of bank bill swap rate plus 1 per cent was arm's length, given that it was consistent with group borrowing costs; however, the Court did not accept that independent parties would agree to amendments to defer and increase interest rates.

v Foreign company tax residency

In the 2016 Bywater case,140 the High Court ruled that four foreign-incorporated companies were Australian tax residents as their central management and control were in Australia due to an Australian individual making decisions for the companies. The foreign-incorporated companies had tried to make it seem, through a number of artificial arrangements, that they were controlled and managed by entities or people outside Australia.

Significantly, the High Court cast doubt on the long-standing principle, previously supported by case law and the ATO, that a company will not be a resident if it does not carry on business in Australia. Although this portion of the decision of the High Court is not binding, the ATO revised its guidance to toughen its position in the wake of Bywater.141

Helpfully for foreign-incorporated companies, the federal government has announced its intention to make technical changes to the definition of 'resident company' for tax purposes142 so that a foreign-incorporated company will be treated as an Australian tax resident only if it has a 'significant economic connection to Australia'. This will be satisfied if the company's core commercial activities are undertaken in Australia and its central management and control are in Australia. This is intended to reflect the position prior to Bywater.

Legislation is yet to be introduced to Parliament on the proposed change. Consequently, foreign companies with decision-makers present in Australia should revisit their governance protocols to confirm that they are not Australian residents.

vi Covid-19-related measures

In light of the effects of the covid-19 pandemic, the ATO has confirmed the following in relation to foreign-incorporated companies.

  1. Corporate residence: if the only reason for holding board meetings in Australia or for directors attending board meetings from Australia is because of covid-19 impacts (i.e., overseas travel bans and restrictions or the board deciding to halt international travel due to covid-19) that by itself will not affect the company's residency status for Australian tax purposes.143
  2. PEs: a foreign-incorporated company will not have an Australian PE if it meets all of the following criteria:
    • the company did not have a PE in Australia before the covid-19 pandemic;
    • there are no other changes in the company's circumstances; and
    • the unplanned presence of employees in Australia is the short-term result of their being temporarily relocated or restricted in their travel because of covid-19.

Outlook and conclusions

Despite Australia having a high headline corporate tax rate in comparison with other countries, Australia continues to attract large amounts of foreign investment. In particular, the Australian government's targeted implementation of the MIT and CCIV regimes demonstrates a commitment to attracting and maintaining foreign investment. The way in which Australia's tax system has been designed in recent years reflects the Australian government's zero-tolerance approach to tax avoidance, which is an approach that is actively enforced by the ATO and supported by the Australian courts. As long as foreign investors can demonstrate the commercial substance of their activities and structures in dealings with the ATO, Australia remains a relatively attractive and competitive destination for investment.

Footnotes

1 Robert Yunan is a special counsel and Patrick Long and Wendy Lim are senior associates at MinterEllison.

2 Employers are also subject to taxes on fringe benefits provided to employees and associates of employees in respect of their employment under the Fringe Benefits Tax Assessment Act 1986 (Cth). No death duties are imposed in Australia.

3 The Commissioner has the general administration of the Taxation Acts of the Commonwealth: see, for example, Sections 1 to 7 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

4 Generally, stamp duty is levied at approximately 5.5 per cent, but surcharges of up to 7 per cent for foreign residents can apply.

5 Lodged returns become 'deemed assessments' under Section 166A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).

6 See, generally, Section 170 of the ITAA 1936.

7 The PAYG system operates to assist workers and businesses in meeting their end-of-year tax liabilities as the payee obtains a credit for the amounts withheld and remitted to the ATO against their tax liability when they lodge their return. Taxpayers will generally obtain a refund where their PAYG credits exceed their ultimate tax liability for the relevant tax period.

8 This rate was increased to 10 per cent from 1 July 2021 and will incrementally increase to 12 per cent from 1 July 2025.

9 See Superannuation Guarantee Ruling SGR 2009/2 for an explanation of the phrase 'ordinary time earnings'.

10 This includes the Australian Charities and Not-for-profits Commission.

11 This involves registration for a tax file number (a unique identifier for the tax and superannuation systems), as well as registration for an Australian Business Number (similar to a VAT number) and for participation in the GST system (if required). Registrations for the PAYG system and the fringe benefits tax system are typically also undertaken at the same time. The taxpayer will separately need to register with state and territory revenue authorities for payroll taxes if they have employees (or deemed employees) in the relevant jurisdictions, subject to a payroll threshold.

12 Division 6 of the ITAA 1936. However, in certain circumstances, trusts can be taxed like companies under Division 6C of the ITAA 1936. Broadly, this is where a trust is a public unit trust and carries on an active trading business. Division 6C is an integrity rule that is designed to prevent the benefits of flow-through taxation from applying to public trading businesses.

13 A 'present entitlement' arises where the beneficiary has a vested and indefeasible interest in the income or capital of a trust. There are specific instances when the trustee withholds and pays tax on behalf of the beneficiaries, such as when the beneficiary is a foreign resident and the payment is not otherwise subject to withholding tax (WHT). In these circumstances, the beneficiary is required to lodge a return and claim a credit for the tax withheld on its behalf.

14 Section 99 of the ITAA 1936.

15 Division 275 of the ITAA 1997.

16 Distributions include dividends and non-capital distributions on instruments that have been classified as tax law equity interests.

17 The availability of a credit is subject to a number of integrity rules, including rules against 'streaming' of benefits to shareholders who would benefit more from franking credits, benchmark rules that require the franking percentage of all dividends in the same period to be the same, and rules denying the credit where equity interests have not been held at risk for an adequate holding period before receipt of the distribution.

18 In these circumstances, there are multiple layers of taxation – one at the entity level and one at the shareholder level – although the imputation system ensures that there is no double taxation of dividend income, which is a feature of the classical dividend systems in the US and Europe.

19 The bill introducing CCIVs, the Corporate Collective Investment Framework and Other Measures Bill 2021, received Royal Assent on 22 February 2022.

20 Division 830 of the ITAA 1997.

21 Broadly, the Australian partners will be subject to tax on the foreign income but should obtain a tax offset for any foreign tax paid.

22 Broadly, dividend income from foreign entities in which the Australian company has a stake of at least 10 per cent: see Subdivision 768-A of the ITAA 1997. The capital gains tax (CGT) exemption under Subdivision 768-G of the ITAA 1997 is also subject to a non-portfolio exemption and is discussed in further detail in this chapter.

23 Subdivision 768-G of the ITAA 1997.

24 Tax-deferred distributions (TDDs) are cash distributions that are sheltered by tax depreciation deductions in the trust. The recipient's tax basis in their units is reduced by the TDD component, meaning they generally pay tax only on disposal, and in those cases generally at the lower long-term CGT rate.

25 A special 15 per cent final WHT rate applies on distributions from a MIT to non-resident unitholders in countries with which Australia has a treaty or Tax Information Exchange Agreement. This is likely to be substantially better than the tax rate for foreign individuals or companies.

26 There are integrity rules that prevent income splitting to minors by applying the top marginal rate to passive income of minors above a very low threshold; however, some degree of income splitting is a feature of the system and is tolerated by the ATO. An example of the ATO's views on income splitting is contained in Ruling IT 2330.

27 There are 'standard' tax conditions that can include compliance with tax laws, payment of all outstanding Australian taxes and annualised reporting. Specific conditions relating to CGT, transfer pricing or thin capitalisation are increasingly being imposed. An example is that the taxpayer must contact the ATO to enter into negotiations with the ATO on transfer pricing matters within 90 days of the transaction completing.

28 The eligibility criteria are broadly an aggregated turnover test subject to an integrity rule that prevents the reduced rate from applying to entities whose income is 80 per cent or more passive. This reduced rate will remain at 25 per cent for the foreseeable future.

29 This is currently A$18,200, meaning that when combined with the low income tax offset and the low and middle income tax offset, individuals do not pay income tax on the first A$23,227 of income (figures for the 2020–2021 and 2021–2022 income years). There is no married or household filing in Australia, although returns do require disclosure of a spouse's income and benefits to assist in means testing of government benefits and other tax concessions.

30 The key integrity rule is an anti-stuffing rule, which prevents the discount from being available broadly where more than 50 per cent of the assets by value or cost base have been held for less than 12 months at the time of the CGT event: see Section 115-45 of the ITAA 1997.

31 There are integrity rules preventing a capital gains discount from flowing through certain trusts.

32 'Source' has been said to be a practical, hard matter of fact and not a legal question in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183. There are some statutory rules prescribing source, including Section 160ZZX of the ITAA 1936, which deems income of an Australian branch of a foreign bank to have an Australian source, and Section 6C of the ITAA 1936, which deems royalties to have an Australian source in certain circumstances. That said, there have been a plethora of cases discussing source. At a high level, a good rule of thumb appears to be that the location of a contract is indicative of source in respect of passive income, but the location of the people providing the services is indicative of the source of service income.

33 The credit is referred to as a foreign tax offset under Division 770 of the ITAA 1997. The offset is generally capped at the lower of foreign tax paid on an item of assessable income or the Australian tax payable on that income. Unused offsets do not carry forward.

34 Division 802 of the ITAA 1997.

35 Australia adopts a model that allocates income to activities of the branch – it does not tax on a functionally separate entity basis.

36 Section 960-555 of the ITAA 1997.

37 A global parent entity is one that is not controlled by another entity according to accounting principles, or if these principles do not apply, commercially accepted principles relating to accounting: see Section 960-560 of the ITAA 1997.

38 The Commissioner is empowered to make a determination that a global parent entity is an SGE if global financial statements have not yet been prepared by that entity for the relevant period, and the Commissioner reasonably believes that, had they been prepared, the entity's annual global income would have been A$1 billion or more. Such a determination may be challenged pursuant to the formal taxation dispute framework in Part IVC of the Taxation Administration Act 1953.

39 For income years commencing on or after 1 July 2019: see Section 21 of the Treasury Laws Amendment (2020 Measures No. 1) Act 2020.

40 Section 960-575 of the ITAA 1997.

41 A range of entities are excluded from the operation of the DPT, including foreign entities owned by a foreign government, foreign pension funds, foreign collective investment vehicles with wide membership and managed investment trusts.

42 Section 177DA of the ITAA 1936.

43 Penalties will be doubled for those entities that cannot demonstrate a documented reasonably arguable tax position.

44 ATO 'ATO nets another e-commerce victory' QC 61026 (last modified 18 December 2019, accessed 8 March 2022) at https://www.ato.gov.au/Media-centre/Media-releases/ATO-nets-another-e-commerce-victory/.

45 ATO 'Corporate Tax Transparency report shows increase in tax paid' QC 64355 (last modified 10 December 2020, accessed 8 March 2022) at https://www.ato.gov.au/Media-centre/Media-releases/Corporate-Tax-Transparency-report-shows-increase-in-tax-paid/.

46 The Treasury Laws Amendment (2021 Measures No. 2) Act 2021 will remove the concessional tax treatment for offshore banking units (OBUs) in respect of offshore banking activities effective from the 2023–2024 income year.

47 The new changes effective from 1 July 2021 were legislated by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (Cth).

48 To be eligible, a company must satisfy the requirements outlined in Section 360-40 of the ITAA 1997.

49 Contained in Section 83A-33 of the ITAA 1997.

50 In broad terms, a 'general entity' is an entity that is neither a financial entity nor an authorised deposit-taking entity.

51 From 1 July 2019, an entity must comply with Australian accounting standards (which are largely aligned with international accounting standards) in determining its assets and liabilities and calculating the value of its assets, liabilities (including debt capital) and equity capital. This results in entities no longer being able to recognise off-balance sheet assets or to revalue assets specifically for thin capitalisation purposes.

52 Section 820-190 of the ITAA 1997.

53 Part 3-90 of the ITAA 1997.

54 A similar regime exists for grouping of entities for GST purposes.

55 In addition, the entities must not be prescribed dual residents (i.e., residents of a foreign country under the relevant tax treaty).

56 See the single entity rule in Section 701-1 of the ITAA 1997 and commentary in binding Taxation Ruling TR 2004/11. On 30 January 2019, the Commissioner of Taxation issued additional guidance on the single entity rule following the 2015 Full Federal Court decision in Channel Pastoral Holdings Pty Ltd v. FCT (2015) FCR 162. A minority in the Full Federal Court held that the single entity rule operated as a 'statutory direction concerned with the calculation of a composite liability' rather than as a 'statutory fiction . . . that a subsidiary of a consolidated group is to be treated as non-existent'. This was contrary to the widely held view that the single entity rule was a statutory fiction. The Commissioner's additional guidance reaffirms the view that the subsidiary is disregarded for tax purposes. It should also be noted that the single entity rule does not apply to other taxes such as stamp duty. Separate relief will need to be obtained under these state- and territory-based regimes.

57 See Subdivision 126-B of the ITAA 1997. The asset must be 'taxable Australian property' if it is being transferred to a non-resident; otherwise, it could be rolled out of the Australian tax net. If it is not taxable Australian property, no CGT relief is available on the transfer. In addition, a rollover will not be available if either the originating entity or the recipient entity is a member of a group in Australia that could be consolidated but has chosen not to consolidate. The policy behind this amendment is unclear other than to provide another incentive to move into the consolidation regime. The relevant explanatory material simply expresses the position that a rollover should be available only for the transfer of a CGT asset between a member of a consolidated group and a foreign-resident top company, but it does not explain why this is the case, even in respect of a transfer from the Australian group to a foreign top company (which is not dealt with at all in the examples).

58 Division 170 of the ITAA 1997 permits tax loss transfers between OBUs outside consolidation.

59 Subdivision 707-C of the ITAA 1997.

60 The mechanism is to limit the use of losses by an 'available fraction' allocated to each bundle of losses, calculated as the ratio of the market value of the joining entity to the market value of the consolidated group. Subdivision 707-C of the ITAA 1997 also contains rules that prevent the artificial inflation of an available fraction (including by means of equity injections and non-arm's-length transactions) and rules that adjust the available fraction of each bundle of tax losses when additional losses are transferred to the head company.

61 Part X of the ITAA 1936.

62 See Parliament of Australia 'Corporate Tax Avoidance report – Part III: Much heat, little light so far' (30 May 2018) at Paragraph 1.10 of Appendix 1: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporatetax45th/Report (accessed 2 March 2022).

63 An exemption exists from accruals taxation where less than 5 per cent of the income is not active income under Sections 384(2)(a) and 385(2)(a) of the ITAA 1936.

64 See Section 340(c) of the ITAA 1936, which defines 'control' as including a situation where a foreign company is controlled by a group of five or fewer Australian entities, either alone or together with associates (whether or not any associate is also an Australian entity).

65 Former Part XI of the ITAA 1936. These rules were complex and time-consuming with little revenue obtained because of the practice of bed-and-breakfasting FIF interests. The regime was repealed in the interests of efficiency with a proposal to replace the rules with a simpler regime; however, these rules were never introduced.

66 See, for example, Deputy Commissioner of Taxation (WA) v. Boulder Perseverance Limited (1937) 58 CLR 223 and FCT v. The Midland Railway Co of Western Australia Ltd (1951) 85 CLR 306.

67 Section 82KK of the ITAA 1936. Integrity rules also exist to prevent deductions on financial instruments from arising on an accruals basis where the recipient treats the income as assessable on a cash or receipts basis, including Division 230 of the ITAA 1997 and Division 16E of Part III of the ITAA 1936.

68 Subdivision 275-L of the ITAA 1997. The Commissioner has a broad discretion to determine the amount of NALI: derived from a scheme involving a MIT and a non-MIT not dealing with each other at arm's length; more than the amount that the MIT might have been expected to derive from dealing with the counterparty at arm's length; not a distribution from a corporate tax entity; not a distribution from a trust that is not a party to the scheme; and not part of a debt safe harbour.

69 Section 275-605 of the ITAA 1997.

70 Division 815 of the ITAA 1997.

71 Under the reconstruction approach, the ATO will seek to identify the notional transaction that would exist under arm's-length conditions and price that transaction to determine the counterfactual. The difference between the tax payable under the notional counterfactual and the actual transaction would determine the transfer pricing benefit that would be open to denial under the transfer pricing rules.

72 Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation [2017] FCAFC 62.

73 Glencore Investment Pty Ltd v. Commissioner of Taxation of the Commonwealth of Australia [2019] FCA 1432. The ATO's appeal to the Full Federal Court was almost wholly dismissed in Commissioner of Taxation v. Glencore Investment Pty Ltd [2020] FCAFC 187. In May 2021, the High Court of Australia refused an application by the ATO for special leave against the decision of the Full Federal Court: see Commissioner of Taxation v. Glencore Investment Pty Ltd [2021] HCA Trans 98.

74 Division 396 of Schedule 1 to the Taxation Administration Act 1953 (Cth) provides the legislative basis for reporting to the ATO under both the FATCA and the CRS. Australia has an intergovernmental agreement with the US on the implementation of the FATCA.

75 See Division 855 of the ITAA 1997.

76 See Division 116 of the ITAA 1997.

77 On 1 March 2019, a new similar business test was legislated under the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Act 2019. The similar business test applies retroactively to tax losses and net capital losses incurred by companies for income years beginning on or after 1 July 2015.

78 The measures apply to eligible corporate entities with less than A$5 billion turnover in a relevant loss year and allow them to carry back losses made in the 2019–2020, 2020–2021 and 2021–2022 income years to a prior year's income tax liability in the 2018–2019, 2019–2020 and 2020–2021 income years. The measures were introduced by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (Cth).

79 Subdivision 768-G of the ITAA 1997.

80 Section 768-510 of the ITAA 1997. Failure to make an election or applying the chosen method incorrectly can result in the default method being applied, which essentially results in 100 per cent of the gain being assessable and no capital loss being allowed.

81 In the case of Commissioner of Taxation v. Fabig [2013] FCAFC 99, two individuals, along with other shareholders in a company, entered a share purchase agreement to dispose of the shares they held for cash and shares in a second company. The purchasing company did not pay the shareholders the same consideration for each of their shares, instead following a private shareholders' agreement entered into by the individuals, which resulted in them receiving consideration disproportionate to their shareholding. For example, an individual with a 50 per cent shareholding received 80 per cent of the consideration. The Full Federal Court held that the arrangement was not one in which participation was available on substantially the same terms for all shareholders, as required by Paragraph 124-780(2)(c) of the ITAA 1997. Accordingly, the individuals were not entitled to rollover relief on their exchange of shares.

82 See Subsection 124-780(2) of the ITAA 1997.

83 See, for example, Subdivision 124-B of the ITAA 1997, which covers replacement rollovers where an asset is compulsorily acquired, lost or destroyed.

84 Under Subdivision 615-A of the ITAA 1997.

85 The conditions for this rollover are harder to satisfy than the scrip for scrip takeover provisions outlined above as the interests received by the shareholders must be proportionate to the ones they exchange: see Subsections 615-15 and 615-20 of the ITAA 1997. Where both the interposed entity rollover and the scrip for scrip takeover rollover can apply, the interposed entity rollover applies in precedence.

86 Division 125 of the ITAA 1997. There are also shareholder dividend relief provisions that may also apply where the company obtains demerger relief. Demergers typically occur where a conglomerate separates into two distinct businesses or a separation occurs in the context of a third party wishing to acquire one of those businesses.

87 A trend was evident from rulings issued by the ATO that sought to deny relief where the demerger was part of a broader arrangement. This was prior to the issue of any binding ruling on this issue.

88 See Taxation Determination TD 2020/6.

89 Taxation Determination TD 2020/6 'Income tax: what is a 'restructuring' for the purposes of Subsection 125-70(1) of the Income Tax Assessment Act 1997?' released on 22 July 2020.

90 Example 4 in TD 2020/6.

91 Example 3 in TD 2020/6.

92 This ATO view has been apparent in the ATO, in June 2018, refusing demerger tax relief for the proposed demerger by AMA Group of one of its businesses and the acquisition of its remaining business by Blackstone, and Class Ruling CR 2018/31 issued on 25 July 2018 in which the Commissioner decided not to grant demerger relief in connection with the demerger of OneMarket Limited from Westfield Corporation Limited before the acquisition of Westfield by Unibail-Rodamco. Taxpayers would typically seek a ruling from the ATO before undertaking a demerger to obtain comfort that demerger relief applies.

93 See Examples 2 and 3 in TD 2020/6.

94 The Board of Taxation 'Review of CGT Roll-overs: Consultation Paper' released in December 2020, available at https://taxboard.gov.au/sites/taxboard.gov.au/files/2020-12/201223ConsultationPaper-GeneralRollover.pdf.

95 See Subdivision 122-A and Subdivision 122-B of the ITAA 1997.

96 Precluded assets consist of trading stock, depreciating assets, an interest in copyrights in a film and a registered emissions unit under Section 122-25(3) of the ITAA 1997. All other CGT assets are non-precluded assets.

97 See Section 47 of the ITAA 1936 and CGT Event G1 in Section 104-135 of the ITAA 1997. A capital loss is usually available if the liquidator declares shares to be worthless before they are cancelled under CGT Event G3 in Section 104-145 of the ITAA 1997.

98 See, for example, Sections 128F(5) and 128F(6) of the ITAA 1936.

99 See Section 104-175 of the ITAA 1997. Similar clawback rules also apply to stamp duty relief.

100 The administrative burden of establishing both the residency and GST registration status of online consumers is the merchant's.

101 The threshold for the financial year ending 30 June 2020 is A$68,740, with a threshold of A$77,565 applying to vehicles meeting the definition of 'fuel-efficient vehicles'. Retailers, wholesalers, manufacturers, and other business that sell and import luxury cars may be liable for the tax, which is applied at the rate of 33 per cent on the value of the car over the threshold.

102 The credit amount varies depending on when the fuel is acquired, the fuel type used and the activity it is used in. Eligible activities are diverse and include, among others, agriculture, mining, nursing and medical services, and industrial furnaces. Businesses must be registered for GST when they acquire the fuel and be registered under the fuel tax credit regime when they lodge a claim for credits.

103 ATO 'Automatic exchange of information guidance – CRS and FATCA' webpage QC 48683 (last modified 21 October 2020, accessed 2 March 2022) at www.ato.gov.au/General/International-tax-agreements/In-detail/International-arrangements/Automatic-exchange-of-information---CRS-and-FATCA/. The broad approach adopted by Australia is motivated by expectations that more jurisdictions will adopt the CRS over time and financial institutions will enjoy cost savings by completing the CRS process fewer times. Although not an OECD BEPS measure, FATCA reporting has been in force in Australia since 1 July 2014. One observation on the interaction between CRS and FATCA is that, under CRS, financial institutions need to identify and report accounts held by US tax-resident individuals (regardless of account balances) using the specific CRS identification rules, even though these accounts may not have been reviewable under FATCA because they fell below the relevant FATCA account balance threshold before 1 July 2017.

104 The default position under Australian tax law is that the Australian reporting entity must lodge all three kinds of reports (master file, local file and CbC report) with the ATO.

105 The rules can apply to payments between 'related parties', members of a 'control group' or between parties under a 'structured arrangement'. These terms are intended to provide a gateway into Division 832; however, they are very broad and flexible concepts. The ATO has issued ATO Law Companion Ruling LCR 2019/3 'OECD hybrid mismatch rules – concept of structured arrangement' and ATO Practical Compliance Guideline PCG 2019/6 'OECD hybrid mismatch rules – concept of structured arrangement', which are intended to address these concepts. For example, the ATO's view in LCR 2019/3 is that a scheme will be a 'structured' arrangement where either the mismatch has been factored into the calculation of the return under the arrangement as agreed between the parties or it could be objectively concluded that the hybrid mismatch was a 'design feature' of the scheme. In the Commissioner's opinion, this requires one to look at an arrangement or dealings (including any marketing of the transaction or structure) and make an objective assessment whether the relevant facts and circumstances contributing to the hybrid mismatch were included intentionally or deliberately as opposed to the hybrid mismatch outcome being merely an unintended consequence.

106 Unlike the DPT or MAAL measures, the hybrid mismatch rules do not have a materiality threshold.

107 See Subdivision 832-J of the ITAA 1997. It is noted that this is in fact an integrity measure inside another integrity measure, which is almost the legislative equivalent of a matryoshka doll.

108 Among other things, Australia has opted out of the PE avoidance articles as the MAAL implements these in domestic law.

109 As at 1 January 2022, the MLI has facilitated modifications to Australia's bilateral tax treaties with Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Hungary, India, Indonesia, Ireland, Japan, Malaysia, Malta, the Netherlands, New Zealand, Norway, Poland, Russia, Singapore, Slovakia, South Korea and the United Kingdom. The ATO predicts that up to 31 of Australia's tax treaties may be modified, to varying degrees, by the MLI: see ATO webpage 'Multilateral Instrument' QC 56703 (last modified 8 December 2020, accessed 2 March 2022) at https://www.ato.gov.au/General/International-tax-agreements/In-detail/Multilateral-Instrument/.

110 The OECD 2015 Reports recommended revisions to the 2010 OECD Transfer Pricing Guidelines (OECD 'Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' published 18 August 2010) that would further clarify the application of the arm's-length principle, including in relation to transactions involving intellectual property and the contractual allocation of risks and corresponding profits between related parties.

111 Over the period since 2000, corporate tax in Australia has ranged between 4.35 per cent of GDP and 6.66 per cent of GDP, compared with the OECD average of 2.67 per cent to 3.59 per cent of GDP (OECD 2021, Tax on corporate profits (indicator), doi: 10.1787/d30cc412-en). Around 20 per cent to 25 per cent of Commonwealth tax revenue (excluding GST) comes from company tax.

112 The ATO notes that, as at 30 June 2018, some of the ATO's key achievements include over A$1 billion in cash collections, future revenue effects of more than A$580 million over the next four years and the completion of many complex audits on industry-leading e-commerce MNEs: refer to ATO 'E-commerce and digital economy outcomes for the Tax Avoidance Taskforce' webpage QC 57576 (last modified 12 December 2018, accessed 2 March 2022) at https://www.ato.gov.au/Business/Business-bulletins-newsroom/Tax-avoidance/E-commerce-and-digital-economy-outcomes-for-the-Tax-Avoidance-Taskforce/.

113 ATO webpage 'Taskforce focus on e-commerce and digital economy industry' QC 57593 (last modified 12 December 2018, accessed 2 March 2022) at www.ato.gov.au/General/Tax-avoidance-taskforce/Taskforce-focus-on-e-commerce/.

114 This has resulted in litigation in respect of the meaning of 'royalty' and the operation of Australia's tax treaties in respect of royalty payments: see, for example, the Full Federal Court decision in Satyam Computer Services Limited v. Federal Commissioner of Taxation [2018] FCAFC 172. In that case, the Full Federal Court held that the payments to the taxpayer that were royalties for the purposes of the DTA but were not otherwise royalties under Australian tax law were deemed to be Australian-source income by reason of Article 23 of the DTA and Sections 4 and 5 of the International Tax Agreements Act 1953. Therefore, they were included in the company's assessable income for Australian tax purposes.

115 Australia has DTAs with the British Virgin Islands, the Isle of Man, Jersey, Guernsey, the Cook Islands, Samoa, Mauritius, the Marshall Islands and Aruba.

116 In line with the OECD's Harmful Tax Practices Initiative and related Global Forum on Taxation.

117 Key provisions of Australia's DTAs in line with the OECD Model Tax Convention relate to PEs, income from real estate, business profits, dividends, interest and royalties, employment income, income of entertainers and sportspersons, pensions or annuities, and income in respect of government service. Residency and tie-breaker rules are also covered. Generally, newer DTAs make specific provision for taxing capital gains, whereas older DTAs (signed before 1985) generally do not.

118 Some DTAs allow for higher maximum WHT rates than the rates prescribed under Australian domestic tax law.

119 Practice Statement Law Administration PSLA 2008/15 – Taxpayer alerts at Page 1.

120 See TA 2018/2. The ATO notes in the alert that: 'Our concerns include whether intangible assets have been appropriately recognised for Australian tax purposes and whether Australian royalty withholding tax obligations have been met. Arrangements that allocate all consideration to tangible goods and/or services, arrangements that allocate no consideration to intangible assets, and arrangements that view intangible assets collectively, or conceal intangible assets, may be more likely to result in a mischaracterisation.' Example 1 in the alert focuses on undivided consideration paid to a foreign company for tangible and intangible goods with no part being treated as being for the IP, which the parties acknowledge has been provided to the Australian entity. Example 2 addresses the use of an IP company that implicitly licenses the use of IP to an Australian company but does not receive any payment for the use of the IP.

121 See TA 2018/4. The ATO is concerned with tax-driven structuring to produce a current deduction but deferral of WHT – for example by accruing interest without capitalising or crediting the interest under the terms of an artificial instrument.

122 See TA 2019/1.

123 See TA 2020/1.

124 See TA 2020/2.

125 See TA 2020/3.

126 This trend has been observed since the appointment of Chris Jordan as Australia's Commissioner of Taxation on 1 January 2013.

127 See, for example, Australian Financial Review 'Deloitte, EY, KPMG, PwC targeted by ATO' (8 October 2018, Neil Chenoweth) at www.afr.com/news/policy/tax/tax-office-targets-deloittes-ey-kpmg-pwc-as-tax-scheme-promoters-20181008-h16cjz and Business Insider 'The ATO is reportedly coming after the big four accountancy firms for tax schemes' (9 October 2018, Chris Pash) at www.businessinsider.com.au/ato-tax-promoter-penalties-big-four-deloitte-ey-kpmg-pwc-2018-10.

128 Although introduced in 2006, these provisions have been applied successfully only four times. The ATO litigated five matters against scheme promoters and the Federal Court of Australia imposed civil penalties against the promoters in the following five cases: (1) Commissioner of Taxation v. Ludekens [2013] FCAFC 100; (2) Commissioner of Taxation of the Commonwealth of Australia v. Barossa Vines Ltd [2014] FCA 20; (3) Commissioner of Taxation v. Arnold (No. 2) [2015] FCA 34; (4) Commissioner of Taxation v. International Indigenous Football Foundation Australia Pty Ltd [2018] FCA 528; and (5) Commissioner of Taxation v. Bogiatto [2020] FCA 1139.

129 See further ATO 'Report schemes and promoters' webpage QC 33634 (last modified 19 November 2019, accessed 2 March 2022) at www.ato.gov.au/general/tax-planning/report-schemes-and-promoters/.

130 See Australian Financial Review 'Tax Office has 50 secret agreements to stop advisers promoting exploitation schemes' (23 October 2018, Edmund Tadros) at www.afr.com/business/accounting/tax-office-has-50-secret-agreements-to-stop-advisers-promoting-exploitation-schemes-20181019-h16u4u.

131 See Australian Financial Review 'Give ATO power to make promoter agreements public, says tax expert' (30 October 2018, Edmund Tadros and Tom McIlroy) at www.afr.com/business/accounting/give-ato-power-to-make-promoter-agreements-public-says-tax-expert-20181024-h17116.

132 [2019] FCAFC 51.

133 In this case, the Full Federal Court reversed the decision of the Federal Court in Resource Capital Fund IV LP v. Commissioner of Taxation [2018] FCA 41, in which the single judge held that: (1) LPs were not separate taxable entities, meaning that the relevant taxable entities were the limited partners (as the taxpayers, eligible US-resident partners were entitled to the benefit of the US–Australia DTA); and (2) the LP's sale of shares in the Australian company had an Australian source, despite the LP and its partners being located overseas. This was because of the significant amount of investment management services provided by individuals in Australia throughout the investment term.

134 Certain 'corporate limited partnerships' are taxed as companies under the rules applicable to limited partnerships in Division 5A of the ITAA 1936.

135 Commissioner of Taxation v. Resource Capital Fund IV LP at [18] and [25].

136 In Resource Capital Fund III LP v. Commissioner of Taxation (2013) 95 ATR 504, Edmonds J at first instance (at [55]–[60]) formed the view that the definition of a 'resident' in Article 4(1)(b)(iii) of the US–Australia DTA imposed a dual requirement to be satisfied – namely that the partnership was a resident of the United States for tax purposes and the income of the partnership had to be subject to United States tax.

137 Resource Capital Fund III LP v. Commissioner of Taxation (2013) 95 ATR 504 at [67] to [74].

138 Resource Capital Fund III LP v. Commissioner of Taxation (2013) 95 ATR 504 at [65].

139 Singapore Telecom Australia Investments Pty Ltd v. Commissioner of Taxation [2021] FCA 1597.

140 This is a reference to the decisions of the High Court of Australia in Bywater Investments Ltd & Ors v. Commissioner of Taxation and Hua Wang Bank Berhad v. Commissioner of Taxation reported at [2016] HCA 45.

141 See Taxation Ruling TR 2018/5 and Practical Compliance Guideline PCG 2018/9, which reflect this view that a company can be a resident of Australia merely through the exercise of central management and control in Australia, without any trading or other traditionally active business activities being carried on in Australia. This ATO guidance means that taxpayers face considerable uncertainty in respect of whether they will be considered a resident of Australia.

142 Budget Measures: Budget Paper No. 2 2020-21, 6 October 2020, available at https://budget.gov.au/2020-21/content/bp2/download/bp2_complete.pdf.

143 ATO 'Working out your residency' QC 45541 (last modified 3 February 2021, accessed 2 March 2022) at https://www.ato.gov.au/business/international-tax-for-business/working-out-your-residency/.

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